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Federal Reserve Bank of New York
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Slow recoveries and unemployment traps: monetary policy in a time of hysteresis
Sushant Acharya
Julien Bengui
Keshav Dogra
Shu Lin Wee
Abstract

We analyze monetary policy in a model where temporary shocks can permanently scar the economy's productive capacity. Unemployed workers’ skill losses generate multiple steady-state unemployment rates. When monetary policy is constrained by the zero bound, large shocks reduce hiring to a point where the economy recovers slowly at best—at worst, it falls into a permanent unemployment trap. Since monetary policy is powerless to escape such traps ex post, it must avoid them ex ante. The model quantitatively accounts for the slow U.S. recovery following the Great Recession, and suggests that lack of swift monetary accommodation helps explain the European periphery’s stagnation.


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Sushant Acharya & Julien Bengui & Keshav Dogra & Shu Lin Wee, Slow recoveries and unemployment traps: monetary policy in a time of hysteresis, Federal Reserve Bank of New York, Staff Reports 831, 01 Nov 2017, revised 01 Aug 2018.
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Note: Previous Title: “Escaping Unemployment Traps”
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Keywords: hysteresis; monetary policy; multiple steady states; skill depreciation
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